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December 17, 2012

What Chained CPI Means, and Why a Cut in a Time of Inadequate Social Security Benefits Makes No Sense

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Let’s just make clear what chained CPI is all about. The idea here is that you should not measure the cost of living simply based on the consumer price index, and then raise the costs accordingly with the rise in prices. Instead, economists say, you have to account for the substitution effect in response to price shifts. When someone cannot afford steak, maybe they buy more chicken, the theory goes. By “chaining” the CPI to account for the substitution effect, you’re really shrinking the inflation in the index, because you’re assuming that the individual will spend less by changing their lifestyle. As a result, cost of living adjustments based on a chained CPI will rise more slowly that COLAs based on an unchained one.

On top of this, you have to understand that there are different kinds of consumer price indexes based on the prices of different baskets of goods. The current CPI for Social Security is the CPI-W, which measures goods purchased by basically middle-class urban wage earners. There’s also a CPI-U, which measures goods purchased by ALL urban wage earners. Those pushing for chained CPI want to move to C-CPI-U. Both the different index and the chaining will result in a smaller cost of living adjustment. And this compounds over time, so that older people get hit harder by the benefit cut. There’s also no accounting for the lifetime income of the beneficiary in the move to chained CPI – it’s an indiscriminate benefit cut.

What Matt Yglesias leaves out of his discussion of the various inflation-measuring indexes is the CPI-E, measured by the Bureau of Labor Statistics on what they call an “experimental” basis, even though it has been measured since 1987. This measures the consumer price index based on goods most commonly purchased by the elderly. That seems like the most logical way to measure the cost of living for, well, the elderly. And it reflects the fact that the largest cost for Americans as they age comes from health care, the costs of which have risen faster than inflation:

Price change for each major expenditure group varied by population because the distribution of expenditures on the products and services within the major groups varied among the three index populations [...] This is especially true within the medical care group. For example, the CPI-E population devoted a substantially larger share of their expenditures to health insurance (see table 2) than did the CPI-U and CPI-W populations, largely because of the availability of employer-provided health care benefits to the latter groups.

A more detailed examination of the indexes shows that the CPI-E had the highest rate of price increase of the three populations for four of the seven major groups. Medical care prices rose in excess of two times the rate of the average for all items in each population group during this 5-year period. Analysis of the relative importance data for the CPI-E, the CPI-U and CPI-W populations indicate that older Americans devote a substantially larger share of their total budgets to the medical care. Because of this, and because the medical care component of the CPI showed the largest price increase, medical care accounts for most of the difference between the higher rate of increase in the CPI-E experimental index–as compared to the CPI-U and CPI-W indexes–during the 1990-95 period.

Incidentally, the idea of chaining medical treatment, as if you can just substitute a hip replacement with something cheaper, is silly. Overtreatment does exist, but the concept of a senior citizen shopping for cheaper medical care is actually kind of cruel.

Shifting to CPI-E would actually reflect the real costs of seniors, and would have their cost of living adjustment keep up with their actual needs. But of course, that’s not the goal of public policymaking. It’s to “save money,” in this case at the expense of the elderly, particularly those over the age of 80.

Chained CPI only makes sense if you think Social Security benefits and the cost of living adjustment are currently adequate enough for seniors. The fact that 15.1% of seniors are in poverty, according to the newest measure, shows that this is not at all the case. We need higher, not lower, Social Security benefits, as retirement security outside of the program withers. But adequacy is not the goal of those who want to slash benefits. And Democratic enablers call it something they can “live with.” Obviously none of them are 80 or older.

See also: Chained CPI is also a regressive tax increase.

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